New Analysis Focuses on New Hampshire's Population Growth, Local Spending and the Statewide Property Tax

Over the last three decades, New Hampshire has undergone profound changes – dramatic
increases in population and developed land, recession, expansion of local
and state budgets, changes in school funding, and the advent of the first
statewide property tax. These changes and their lasting fiscal effects are
the focus of a new analysis by Richard England, professor of economics at
the Whittemore School of Business and Economics.

England's analysis, "Population Growth, Local Government Budgets, and
the Property Tax in New Hampshire," appears in the Jan. 21, 2008, special
report of State Tax Notes. His study was funded by the Lincoln Institute
of Land Policy, Cambridge, Mass.

"After several decades of rapid population growth and expansion of
state and local budgets, the property tax is alive and well in New Hampshire.
Along the way, its citizens have witnessed a severe real estate slump and
an educational funding crisis. Despite those shocks, the property tax has
helped to fund higher real spending per pupil and state assumption of the
responsibility for adequate public education," England says.

New Hampshire's population grew by more than 40 percent from 1972 to 1992,
leading to a tripling of local spending during those 20 years. While cities
and towns increased revenues to keep up with spending, according to England,
property tax rates actually decreased as New Hampshire homeowners saw the
value of their homes skyrocket.

"Analysis of New Hampshire Department of Revenue Administration data
confirms that an expansion of the property tax base of epic proportion took
place during the 1970s and 1980s," he says. "For example, the average
sales price of an existing single-family home in New Hampshire increased
by 316 percent in nominal terms from the first quarter of 1975 through the
fourth quarter of 1989."

In fact, the per capita real value of the property tax base more than tripled
in less than two decades, growth that was heavily rooted in the construction
industry. During that period, there was a birth of new subdivisions, office
parks, regional malls, urban mill renovations, and vacation homes. The Seabrook
nuclear power plant also was constructed.

By 1990, the nation was in a recession, which was particularly acute in
the Granite State's construction and real estate sectors, England says. Homeowners
saw the market value of their homes decrease, yet local authorities continued
to rely on the boom-time values determined at the peak of the real estate
market for revenue collection.

"One can imagine the consternation and even anger of many homeowners
as their assessed valuations increased, or at best, remained the same even
though the market value of their homes was falling, and their labor market
prospects were gloomy," according to England. "The combined effect
of prolonged recession, declining real estate prices, and rising property
tax rates in the 1990s was the creation of a perfect storm in the state's
political and legal arenas."

That perfect storm spawned Claremont lawsuits brought by five school districts
suing the state for not providing an adequate education to all public school
students, as required by the state constitution. The charge was that, because
public schools were funded primarily by local property taxes, property-poor
school districts were at a disadvantage. The state ultimately lost and instituted
the first-ever statewide property tax designed to fund an adequate education
for all public school students.

While most communities received back what they contributed under the statewide
property tax, a handful of property-rich towns did not. This disparity sparked
a political firestorm between "receiver" and "donor" towns
that continues today.

By the end of the century, New Hampshire's revenue structure had changed
in fundamental ways. The state saw several new taxes added during this period,
such as the Business Enterprise Tax (1993), and statewide property tax and
car rental taxes (1999). The state also increased the Business Profits Tax
rate from 6 percent to 8.5 percent.

"Trying to solve public school funding controversies by taxing business
profits more heavily will not be a long-term fiscal solution if it drives
value-creating jobs from the state," England says. "Gov. Deval
Patrick has just proposed cutting the tax rate on corporate profits in Massachusetts.
New Hampshire will lose out in the competition for good jobs if it raises
the business profits tax even higher."

On a positive note, the fiscal change has resulted in an overall improvement
of property tax administration throughout the state. Timeframes for property
revaluations have been standardized, and local assessors appear to be tracking
market values for homes more carefully than they once did.

"The icing on that fiscal cake is that property tax administration
finally reached modern professional standards at the dawn of the 21st century," England
says.